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Document Summaries for the Week of Feb. 29, 2016

C CORPORATIONS

In rejecting the taxpayer’s motion for partial summary judgment, the Tax Court held that the IRS’s adjustments, which increased the consolidated group’s taxable income by $3.5 billion, were not arbitrary, capricious, and unreasonable. The Tax Court held that (1) neither Sec. 482 nor the regulations require the IRS to determine the true separate taxable income of each controlled taxpayer in a consolidated group when making adjustments, and (2) Sec. 482 and the regulations allow the IRS to aggregate one or more related transactions instead of making specific adjustments for each type of transaction. Guidant LLC, 146 T.C. No. 5 (2/29/16).

EMPLOYEE BENEFITS

Proposed regulations on a pension plan in critical and declining status would provide guidance on the limitation under Sec. 432(e)(9)(D)(vii) on a suspension of benefits under Sec. 432(e)(9) under a multiemployer defined benefit pension plan that includes benefits directly attributable to a participant’s service with any employer that has withdrawn from the plan, paid its full withdrawal liability, and, pursuant to a collective bargaining agreement, assumed liability for providing benefits to participants and beneficiaries equal to benefits for those participants and beneficiaries reduced as a result of the financial status of the plan. REG-101701-16 (2/29/16).

ESTATES, TRUSTS & GIFTS

Estate consistent basis rules are proposed

The IRS issued proposed and temporary regulations governing the requirement of consistency between a recipient’s basis in certain property acquired from a decedent and the value of the property as finally determined for federal estate tax purposes, as well as reporting the value to the IRS and beneficiaries. REG-127923-15; T.D. 9757 (3/3/16) (see related news story).

EXEMPT ORGANIZATIONS

The IRS served notice to potential donors of an organization that recently filed a timely declaratory judgment suit under Sec. 7428, challenging revocation of its status as an eligible donee under Sec. 170(c)(2). Under Sec. 7428(c), donors may make tax-deductible contributions up to certain limits from the date the notice of revocation is published in the Internal Revenue Bulletin until the date a court first determines that an organization does not qualify for exemption. Announcement 2016-8 (2/29/16).

The IRS notified potential donors that the Tax Court had entered an order dismissing a declaratory judgment proceeding under Sec. 7428, with the result that tax deductible contributions could no longer be made to that organization after that date. Announcement 2016-9 (2/29/16).

IRS announces organizations that had tax-exempt status revoked

The IRS listed organizations that have had their Sec. 501(c)(3) status revoked for failure to meet the requirements for tax-exemption. Contributions made to the organizations by individual donors after the date of the announcement are no longer deductible under Sec. 170(b)(1)(A). Announcement 2016-10 (2/29/16).

INDIVIDUALS

The First Circuit partially affirmed a district court and held that the taxpayer who maintained an offshore bank account had to comply with an IRS summons for banking and financial documents the taxpayer was required to keep under the Bank Secrecy Act (BSA). The court agreed with the district court that the requested documents fell within the required-records doctrine, which prevents an individual from resisting, in the name of the Fifth Amendment, the production of certain records the taxpayer is required to maintain. The district court’s enforcement of a summons for documents not subject to the BSA was vacated and remanded. Chen, No. 14-2003 (1st Cir. 2/29/16).

Taxpayer liable for penalties for failing to properly report his tax liability

The Tax Court, taking into consideration the taxpayer’s professional experience as a policy analyst and his post-graduate business degree, held that the taxpayer did not show that he had made a good-faith effort to assess his proper tax liability for 2009. As a result, the court upheld an accuracy-related penalty. Ashmore, T.C. Memo. 2016-36 (3/2/16).

Damages that resolved class action lawsuit are includible in taxpayer’s income

The Tax Court held that damages paid to the taxpayer as part of a settlement with a former employer were mainly to resolve claims in a class action lawsuit and not for speculative claims of loss of consortium. Therefore, the settlement payment was includible in the taxpayer’s income, and the Tax Court sustained the IRS’s assessment of an accuracy-related penalty. Dulanto, T.C. Memo. 2016-34 (3/2/16).

Refunds relating to state tax credits are includible in couple’s income

The Tax Court held that tax overpayments a couple received in 2009, 2010, and 2011 from refunds of New York income tax that resulted from state tax credits were federal taxable income. The couple’s arguments to the contrary were held without merit in light of the court’s holding in Maines, 144 T.C. 123 (2015). Rivera, T.C. Memo. 2016-35 (3/2/16).

Claimed cash contributions “improbable”

The Tax Court held that a couple could not deduct certain claimed cash charitable contributions due to lack of substantiation. The court deemed the amounts claimed for certain short periods to be “improbable” and without independent verification. Brown, T.C. Memo. 2016-39 (3/3/16).

Failure to disclose relevant facts on return results in penalty for taxpayer

The Tax Court held that, although the taxpayer was not negligent per se, he did not act with reasonable cause and good faith by failing to adequately disclose in his tax return the relevant facts affecting an item’s tax treatment. Accordingly, the court imposed an accuracy-related penalty for 2010. Navaid, T.C. Memo. 2016-37 (3/3/16).

The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued proposed regulations governing Reports of Foreign Bank and Financial Accounts (FBARs) that would expand and clarify the exemptions for U.S. persons with signature or other authority over foreign financial accounts; remove special rules that permit limited account information to be reported when a U.S. person has financial interest in, or signature authority over, 25 or more foreign financial accounts; and amend the regulations to reflect the FBARs’ new April 15 due date. RIN 1506-AB26 (3/1/16).

IRS PROCEDURE

IRS can use mitigation provisions to reopen closed tax years for a trust and beneficiaries

The Tax Court held that the IRS satisfied all requirements and conditions of the mitigation provisions in Sec. 1311 through Sec. 1314. Thus, the statute of limitation for the taxpayers’ 2001 tax returns was extended until Aug. 8, 2008, the date of the final determination of tax liability. Consequently, the notices of deficiency the IRS sent to the taxpayers on Sept. 2, 2008, were timely, and the taxpayers’ 2001 tax years can be reopened for the limited purpose of correcting a Sec. 1312(5) error, which permits adjustments for “correlative deductions and inclusions” for trusts and beneficiaries. Costello, T.C. Memo. 2016-33 (3/1/16).

Taxpayers’ lawyer must pay almost $20,000 for bringing case to trial

The Tax Court found a couple’s lawyer had unreasonably and unnecessarily brought and prolonged his clients’ case and thus was liable for a penalty of almost $20,000 under Sec. 6673(a)(2) for the cost of the time expended by the IRS’s attorneys on the case. Best, T.C. Memo. 2016-32 (2/29/16).

Rules govern awards of attorneys’ fees and costs in proceedings against the IRS

The IRS issued final regulations and a revenue procedure on awarding administrative and litigation costs under Sec. 7430 to a prevailing party in any administrative or court proceeding brought by or against the United States for determining, collecting, or refunding any tax, interest, or penalty. T.D. 9756; Rev. Proc. 2016-17 (2/29/16) (see related news story).

The IRS issued final and temporary regulations clarifying the circumstances in which utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company for purposes of the utility allowance under the Sec. 42 low-income housing credit. T.D. 9755 (3/2/16).

Form 872 can be used to extend the statute of limitation for year still open under Sec. 6501(f)

The Office of Chief Counsel advised that a Form 872, Consent to Extend the Time to Assess Tax, can be used to extend a period of limitation on assessment that is still open under Sec. 6501(f) (personal holding company tax, six years), even if the normal three-year period of limitation under Sec. 6501(a) has otherwise expired. According to the Chief Counsel’s Office, there is no need to amend the form with additional language. CCA 201610019 (3/4/16).

Form 872-A did not terminate with respect to partnerships for which no assessment had been made

The Office of Chief Counsel advised that a Form 872-A, Special Consent to Extend the Time to Assess Tax, had terminated with regard to a particular partnership because an assessment was attributable to that partnership. However, the Chief Counsel’s Office said, the Form 872-A was not terminated with regard to two other partnerships to which no assessment was attributable. CCA 201610020 (3/4/16).

Full TIN not legally required on IRS letter to taxpayer

The Office of Chief Counsel advised that the IRS is not legally required to include a taxpayer’s full taxpayer identification number (TIN) on a letter it sends to the taxpayer. However, the Chief Counsel’s Office said, this does not mean that the TIN should always be truncated or omitted. CCA 201610018 (3/4/16).

Taxpayer may challenge employment tax liabilities at CDP hearing

The Tax Court held that Sec. 6330(c)(2)(B) did not preclude the taxpayer from challenging certain employment tax liabilities, resulting from an alleged worker misclassification, at its collection due process hearing. As a result, the court denied an IRS motion for summary judgment. Hampton Software Dev., LLC, T.C. Memo. 2016-38 (3/3/16).

MISCELLANEOUS

Chief Counsel clarifies types of entities that qualify as a health insurance issuer under Sec. 9832(b)(2)

The Office of Chief Counsel advised that a non-risk-bearing entity providing services under a state Medicaid program does not have the risk-shifting or risk-distribution elements of insurance and consequently is not a health insurance issuer under Sec. 9832(b)(2). Conversely, a risk-bearing entity that is licensed to engage in the business of insurance in a state, is subject to state law that regulates insurance, and has the risk-shifting or risk-distribution elements of insurance is a health insurance issuer. CCA 201610021 (3/4/16).

PARTERNSHIPS

IRS requests comments on new partnership audit rules

The IRS requested comments on a number of topics regarding the new partnership audit procedures that were enacted last year. Notice 2016-23 (3/4/16) (see related news story).

TAX ACCOUNTING

Company’s income from sale of unredeemed gift cards may be deferred

The IRS National Office advised that income from a company’s sale of unredeemed gift cards could be deferred under Regs. Sec. 1.451-5 to the extent the company could make an appropriate estimate of the amounts that are deferrable under Regs. Sec. 1.451-5, using an allocation similar to that found in Regs. Sec. 1.451-5(a)(3). The National Office also advised that, for gift cards that could be redeemed for goods and nonintegral services, the company could apply allocation rules similar to those described in Regs. Sec. 1.451-5(a)(3) by treating the total of its outstanding gift cards at the end of the tax year of their sale as a single agreement and allowing estimates to be used for the application of Regs. Sec. 1.451-5(a)(3). TAM 201610017 (3/4/16).

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”

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